Wifo/IHS Forecast: Austria's Economy Will Not Recover by 2025

The budget consolidation of the future government and structural problems are slowing down the expected economic recovery. After two years of recession, Austria's economy is expected to grow by 0.6 or 0.7 percent in real terms in 2025, according to the current Wifo/IHS economic forecast. The autumn forecast still assumed +1.0 or +0.8 percent. The budget deficit is expected to rise to 4.2 or 3.7 percent of gross domestic product (GDP) next year.

Less Economic Growth in 2025, Higher Budget Deficit

The institutes have prepared their winter economic forecast for 2024-2026 without taking into account a budget consolidation, as the extent and timing of spending cuts and possible tax increases are still being hotly debated in coalition negotiations between ÖVP, SPÖ and NEOS. "A reduction of the budget deficit to below 3 percent of GDP in 2025 would further dampen the already weak economy in Austria," said the Economic Research Institute (Wifo). Instead of moderate growth, "a new recession is threatened in this case". For 2026, Wifo and IHS expect a GDP increase of 1.2 or 1.3 percent without government austerity measures.

No Signals for Economic Upturn

Austria's economy has been shrinking for the second year in a row. The recession in industry and construction has continued. Private consumption, exports and companies' gross capital investments have been declining for two years. In 2023, real economic output in Austria fell by 1 percent, in 2024 the decline is expected to be 0.9 percent. In October, Wifo and IHS still predicted a slightly smaller GDP minus of 0.6 percent for the current year. "The domestic economy has structural problems, and there are no signals yet for a strong upturn," write the economists of the Institute for Advanced Studies (IHS).

Inflation Expected to be Lower in 2025

After the record inflation years of 2022 and 2023 with 8.6 percent and 7.8 percent, inflation in Austria is expected to be significantly lower this year at 3.0 or 2.9 percent. However, a significant increase in energy prices is expected at the beginning of 2025, as the electricity price brake expires, the energy levies for electricity and natural gas are returned to their normal level, and the green electricity subsidies come back into effect. In addition, network charges and the CO2 price are rising. Therefore, Wifo expects an increase in inflation to 2.5 percent at the beginning of the year.

Unemployment Numbers Expected to Rise Again

For the full year 2025, Wifo and IHS predict an increase in consumer prices of 2.3 and 2.6 percent respectively. For 2026, the economic researchers expect an inflation rate of 2.0 and 2.1 percent respectively.

Two years of recession are also noticeable in the unemployment figures. Wifo and IHS expect an equal increase. The unemployment rate is expected to rise from 6.4 percent in 2023 to 7.0 percent this year and 7.4 percent next year.

Budget Deficit Rises to 4.2 Percent Next Year

The forecast from Wifo and IHS also includes a government budget deficit of 4.2 and 3.8 percent of economic output next year. Possible austerity measures by the future government were not taken into account in the forecast. This year, the deficit is expected to be 3.7 percent of GDP. Austria is thus significantly above the EU debt rules (Maastricht criteria) of 3 percent.

A reduction of the budget deficit from 4.2 to 3 percent of gross domestic product (GDP) would, according to Wifo, correspond to a consolidation requirement of "about 6 billion euros". However, a far-reaching budget consolidation of the public sector would significantly slow down economic growth in Austria. "A sudden reduction" of the deficit to the Maastricht upper limit would dampen GDP growth - depending on the type and timing of the measures - by 0.5 to 1 percentage point, the Wifo economists explained.

Higher Social and Pension Expenditures Increase Deficit

The increase in the deficit next year is "due to the lagging indexation of monetary social benefits, a strong increase in the number of pension recipients and rising expenditures of the states and municipalities in the areas of environment, housing, education as well as health and care within the framework of the Future Fund," writes Wifo in its quarterly economic forecast.

Without savings, the government budget deficit in 2026 is expected to be 4.1 percent or 3.6 percent according to Wifo/IHS calculations. The state's debt level would climb to 84.5 percent of GDP by 2026 without budget consolidation.

(APA/Red)

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